The Consumer Financial Protection Bureau has proposed a set of new rules
aimed at protecting consumers from the cycle of long-term debt that often
comes with payday loans. Anyone who has ever needed a payday advance knows
that these short-term loans, which have a staggering average interest
rate of 390% (reaching up to 1000%), can lead to lasting consequences.
In fact, every year in the United States, payday loan borrowers spend
roughly $7 billion in interest and fees alone, and spend six months or
more in debt per year on average. It is widely recognized that payday
lending practices as they currently are have created a “debt trap”
cycle that sets up borrowers to fail before they even receive the loan.
Knowing this, the CFPB has proposed the following changes to restrict predatory
Regulation of penalty fees. When a borrower takes out a payday advance, they may have to give their
lender access to their checking account. On payday, the lender has the
authority to automatically debit the repayment amount from the account.
If, however, the borrower’s account does not contain sufficient
funds, it could end up costing them expensive overdraft fees. The CFPB
proposes that lenders be required to provide the borrower with written
notice at least three days before attempting to collect payment from a
bank account, including information on how much will be debited and the
date of the upcoming transaction.
“Full payment” tests. Prior to being able to extend a loan, a lender would be required to verify
that the borrower will have the means to repay the debt without needing
a renewal and still have enough to cover basic living expenses like rent,
utilities, food, etc. This proposal is intended to cut down on the number
of people who get stuck with loans that they might not be able to repay.
Furthermore, if the lender attempts to collect repayment twice without
success, they will have to obtain written authorization from the borrower
before they can make another attempt.
End the “debt trap” cycle. More than 80% of payday loans are re-borrowed within a month. The goal
of the CFPB is to make it more difficult for lenders to re-issue or refinance
a loan, which keeps borrowers in the debt trap cycle longer.
End use of auto titles as collateral. The CFPB is also proposing that auto titles no longer be used as collateral
to obtain a loan. A study has found that one out of five borrowers using
auto title loans as collateral were having their cars seized for failure
to repay their loan. This leads to the secondary consequence of taking
away the borrower’s means of getting to his or her job, driving
them deeper into debt.
The CFPB is seeking comments from the general public on these proposals
before any final regulations are issued.
If you are struggling to pay off a high-interest loan, credit card debt,
or any other type of consumer debt, we invite you to get in touch with
a Chicago consumer lawyer at Sulaiman Law Group, LTD. We would be happy
to review your financial situation and talk about which debt relief options
may benefit you.
schedule an appointment, please call (312) 313-1613 today.